Chapter 13, Problem 16QAP

Summary Introduction

Adequate information:

Debt-equity ratio $\left(\text{D/E}\right)$ = 0.65

Debt $\left(\text{D}\right)$ = 0.65

Equity $\left(\text{E}\right)$ = 1

Capital required $\left(\text{K}\right)$ = $1,850,000

Cost of equity $\left({\text{k}}_{\text{e}}\right)$ = 11%

After-tax cost of debt $\left({\text{k}}_{\text{d}}\right)$ = 4.3%

Growth rate $\left(\text{g}\right)$ = 3%

Adjustment factor $\left({\text{A}}_{\text{f}}\right)$ = 2%

To compute: To identify the circumstances under which the project should be taken or not.

Introduction: Breakeven cost refers to the equilibrium point where the company is at the no profit no loss stage.